The merger of British Airways and Iberia moved a step closer after the two airlines signed the agreement approving their tie-up.

BA said it expected the merger to be completed by the end of this year in a move that will create one of the world's largest airline groups, with 408 aircraft carrying more than 58 million passengers a year.

The tie-up will create a new holding company called International Airlines Group, but the airlines will retain their current operations and continue to use their individual brands.

The merger agreement follows the memorandum of understanding signed between the two airlines in November.

BA chief executive Willie Walsh said the merged company will provide customers with a larger combined network.

"It will also have greater potential for further growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services," he added.

The merger is subject to regulatory approval from competition authorities including the European Commission, and to approval by both British Airways and Iberia shareholders.

Iberia will also be entitled to terminate the merger agreement if the pension recovery plan agreed between BA and its pension trustees is found to be "materially detrimental" to the merger.